Can First Solar And SunPower Benefit From Chinese Market Demand?

Two of America’s largest solar equipment manufacturers, First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), are expanding their presence in the Chinese solar space announcing two separate deals targeted at the country’s growing utility scale solar market. While the deals will give the firms an entry into the booming  Chinese solar market, we are concerned about the long-term prospects of the deals given the competition from China’s massive solar industry, which enjoys the backing of the government, and the potential repercussions of the on-going solar trade war between China and the United States.

Demand Growth In The Chinese Market

China may become the world’s largest solar market by next year on the back of growing energy needs, and the government’s incentives for the solar sector. ^[1] Analysts estimate that Chinese panel demand for 2013 could be as high as 7 GW. ^[2] The Chinese government is targeting an installed capacity of about 21 GW of solar power by 2015. To meet this target, the government is providing attractive feed-in-tariffs and subsidies and has also streamlined access to the national power grid for distributed solar power projects.

First Solar and SunPower’s Moves And Their Competitive Advantage

First Solar will supply 2 MW of its thin film solar panels to a solar farm in the Xinjiang province of western China during the first quarter of 2013. This will be the company’s first demonstration project in China and aims to showcase the firm’s photovoltaic technology to the Chinese market. ^[2] First Solar has traditionally had an advantage in the utility scale space thanks to its relatively low cost panels that perform well under a variety of lighting conditions and under high temperatures. The firm also has the experience and know-how in building large scale solar farms, which could give it an edge over Chinese competitors like LDK Solar who have only recently made inroads into this space.

SunPower said that it has teamed up with three Chinese firms to manufacture and deploy the company’s solar concentrator technology. Solar concentrators use mirrors along with tracking systems to concentrate solar energy onto solar panels, enabling them to capture more sunlight. The firm will invest $15 million for a 25% stake in the joint venture, which will be located in the Inner Mongolia region of China. ^[3] SunPower is known as a technological leader in the solar industry with some of its solar panels offering efficiencies as high as 20%, which are up to 3% to 4% higher than Chinese panels.

What Are The Risks Involved?

1) Chinese Competition – Chinese firms currently dominate the global solar landscape, with about 8 out of 10 of the world’s largest solar firms located in China. These firms have massive capacity, most of which is underutilized. According to Reuters, Chinese solar firms have about 50 GW of annual manufacturing capacity while global demand for the year is estimated at just about 30 GW, which is forcing firms to push products into the domestic market at extremely low prices at which American companies may not be able to compete. LDK solar, for instance, reported an average panel price per watt of about $0.67 in Q3, in comparison SunPower’s panels sell for over $1/watt.

2) Solar trade war – The American government concluded its investigation into the import of Chinese solar products, imposing high anti-dumping and countervailing duties on Chinese solar firms. (See Also: US Finalizes Tariffs On Chinese Solar Firms, But Benefits For American Firms Dubious) In retaliation, China launched an investigation into the imports into the country earlier this year. Given these tensions, there is a possibility that American solar firms selling products in China could be exposed to repercussions of the trade war.

3) Applicability of subsidies – Most of the growth in the Chinese solar market is expected to be driven by government subsides, which were introduced with the primary intention of boosting demand for domestic solar products, thereby alleviating some of the pain for Chinese manufacturers. It will remain to be seen how receptive the government is in extending these subsides for imported solar products.

We have a price estimate of $5.23 for SunPower, which is about 15% ahead of the current market price.

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1. First Solar, SunPower Look To Cash In On China’s Solar Boom, Reuters [↩]
2. First Solar Press Release [↩] [↩]
3. SunPower Press Release [↩]